5 Most Common Reasons for Chargebacks
Table of Contents
- What Are Chargeback Reason Codes?
- What Is Friendly Fraud?
- What Is Affiliate Fraud?
- How Does Bad Customer Service Lead to Chargebacks?
- How Do Fulfillment Issues Cause Chargebacks?
- Canceled Subscriptions and Chargebacks
- Know Where Your Chargebacks Come From
- What Are the Major Card Networks With Reason Codes?
- Can a Merchant Be Responsible For a Chargeback?
- What Are the Three Types of Chargebacks?
Every chargeback has a root cause, but sometimes that cause can be difficult to determine. There are countless reasons a cardholder might dispute a charge on their account, and short of reading their mind, you can never be 100% certain you know what led them to that decision. There are some reasons that are more common than others, however.
Merchants need to have a good grasp of the root causes of their chargebacks in order to effectively prevent them. The best way to accomplish this is by having chargeback analysts examine information obtained through fighting chargebacks. For those who are relatively new to proactive chargeback management, however, a look at the most common causes of chargebacks can provide some direction to help them focus their initial efforts. What are some common reasons for chargebacks, and how can merchants prevent these chargebacks before they occur?
What Are Chargeback Reason Codes?
When a cardholder and issuing bank initiate a dispute, they provide an information package to the acquiring bank, which then passes it on to the merchant. Among the information contained in this package is the chargeback reason code.
The fact that every card network has its own list of reason codes can make figuring out what a particular reason code means a bit complicated at times. That's why we created this handy reason code lookup tool that includes all the codes for all four major card networks. Unfortunately, the reason code attached to a chargeback doesn't always tell you the real reason behind it. Let's go beyond the reason code and look at five of the most common causes of chargebacks.
What Is Friendly Fraud?
Friendly fraud is a broad category that includes a number of different chargeback scenarios. In many cases of friendly fraud, the customer is trying to cheat the system, purchasing the product or service and then filing a chargeback to obtain that purchase for free.
In other cases, customers may dispute a charge because they're unhappy with the product or service, angry at the merchant over a perceived slight, or because they don't recognize a legitimate transaction and falsely believe it to be fraudulent.
Friendly fraud is difficult to prevent, since there's no way to read the mind of every customer to determine whether or not they're likely to file a false chargeback claim in the future.
The best defenses against friendly fraud are customer service, blacklisting, and chargeback representment.
Having helpful and available customer service means that customers will be more likely to try to resolve the issue with the merchant directly instead of disputing the charge through their bank. While it might not feel great to issue a refund to the kind of customer who will go on to file a false chargeback against the merchant if they don't get one, the cost difference between refunds and chargebacks makes it well worth it from a financial perspective.
Blacklisting helps prevent a customer who commits friendly fraud from doing so again by adding information such as their card number, billing address, and IP to a blacklist. Fighting friendly fraud chargebacks through representment can recover some of the revenue lost to friendly fraud.
What Is Affiliate Fraud?
In one type of affiliate fraud, the affiliate marketer will either create or solicit a large number of fraudulent purchases using stolen credit card information. Then they’ll cash out on their dividends before the merchant has time to notice. When the cardholders notice the fraudulent charges on their accounts, the merchant is hit with a sudden wave of chargebacks.
The best way to prevent affiliate fraud is to conduct careful checks on any affiliate marketer you're considering working with to make sure they're reputable.
How Does Bad Customer Service Lead to Chargebacks?
Customers who’ve waited on hold for hours, been routed through countless call centers, had their emails and messages ignored, or encountered a rude and unhelpful representative may end up going to their bank to get their money back out of pure frustration.
Merchants can prevent these chargebacks by making sure their customer service can be contacted quickly and easily, and by either having a generous refund policy in general or by giving customer service representatives extra leeway to issue refunds to customers not covered by the policy.
After all, a refund doesn't come with the extra fees and consequences of a chargeback, so it's almost always better to refund an unsatisfied customer than deny them and have to deal with a chargeback.
How Do Fulfillment Issues Cause Chargebacks?
There are two ways to prevent chargebacks caused by merchant error. The most effective one is to prevent merchant errors from happening in the first place.
Taking a closer look at your chargeback cases can show you problems with your business that you might not otherwise be aware of.
Of course, no business is completely free of errors, and that's where customer service comes in. Since most customers will contact the merchant first if there's a problem with an order, having excellent customer service can prevent these chargebacks as well.
Canceled Subscriptions and Chargebacks
For merchants that operate on a subscription model, problems with cancellations can also lead to chargebacks. Sometimes customers are inadvertently charged after already canceling their subscription, leading them to dispute the charge. More often customers simply forget to cancel before another charge goes through and try to recover that money with a chargeback.
To minimize these chargebacks, remind your customers by email a few days before a recurring charge is about to be processed, and include a cancellation link in the email. It also helps if your customers know they can contact you for a refund if they forget to cancel, since many customers won't think this is an option.
Know Where Your Chargebacks Come From
It’s vital to know what’s causing your chargebacks so you can not only fight them, but prevent them from the ground up as well.
Chargebacks cost merchants far more than just the lost transaction amount. Once you add in marketing expenses, cost of customer acquisition, transaction fees, costs of goods, and more, chargebacks often cost merchants more than two times their initial losses. They can also put merchant accounts in jeopardy and threaten the very payment methods you need to do business.
Identifying your chargeback reason codes, understanding them, and taking steps to remedy the root causes of your chargebacks is key to keeping your merchant accounts intact.